Audit committee composition, "gray directors," and interaction with internal auditing

The functioning of corporate audit committees was criticized in recent years by the Treadway Commission, the Public Oversight Board, the Kirk Panel, and the SEC Chairman. In response, the NYSE and NASD sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report includes recommendations aimed at strengthening director independence and qualifications, and highlights the role of internal auditors in assisting audit committees in the corporate governance process. Moreover, the first three recommendations of the BRC relate to audit committee composition: absence of inside or "gray" directors, and presence of a member with financial expertise. The association between audit committee composition and the committee's interaction with internal auditing is examined. Results, based on responses from chief internal auditors of 114 public companies, indicate that committees comprised solely of independent directors and with at least one member having an accounting or finance background are more likely to: 1. have longer meetings with the chief internal auditor, 2. provide private access to the chief internal auditor, and 3. review internal audit proposals and results of internal auditing. These findings provide empirical support for the BRC's recommendations related to audit committee composition.